#228. In the eye of the Perfect Storm



The title of this report makes intentional reference to the Perfect Storm paper published by Tullett Prebon back in 2013, when I was head of research at that organization.

Since then, my efforts have been concentrated on (a) promoting discussion (at Surplus Energy Economics) about the energy basis of the economy, and on (b) building an economic model (SEEDS) founded on these principles.

Whilst theoretical debate will continue, and models can always be further refined, time has run out for the purely intellectual contest between conventional and energy-based interpretations of the economy.

Accordingly – and with due apology to those to whom much of this is already familiar – what follows is a comprehensive summary of what we know about the economy as an energy system, and what we can reasonably infer about the future based on this understanding.


Faced with rising inflation, worsening pressure on living standards and significant nervousness in the markets, we’re at liberty – if we so choose – to ascribe all of these problems to the combined effects of the coronavirus crisis and the war in Eastern Europe, and to assure ourselves that the ‘normality’ of never-ending economic growth will return once these temporary vicissitudes are behind us.

The alternative is to face facts.

These are that prior growth in material prosperity has gone into reverse, and that a financial system erected on the mistaken presumption of ‘infinite growth on a finite planet’ faces challenges of a magnitude which eclipse all past experience.  

Understood as a system supplying the goods and services which constitute material prosperity, the economy is a dynamic propelled by the supply, value and cost of energy.

The critical element in this equation is the Energy Cost of Energy, which determines how much surplus (ex-cost) energy is available to the system. The ECoEs of oil, natural gas and coal have been rising relentlessly, undermining the fossil fuel foundations of the modern economy.

Protracted efforts to overcome energy deterioration with financial innovation have failed, simultaneously driving a wedge of instability between the ‘real’ or material economy of resources, goods and services and the ‘financial’ or proxy economy of money and credit.

Since prices are the point of intersection between these two economies, surging inflation is a logical signifier of the moment at which divergence becomes unsustainable, and the system becomes subject to forces tending towards a restoration of equilibrium between the energy economy and its financial counterpart.

Financially, and as fig. 1 illustrates, the extent of the imbalance between the material and the monetary economies reveals the downside risk in a system of forward commitments which has grown exponentially as monetary expansionism has fought a losing battle against material deterioration.

Meanwhile, whilst top-line prosperity erodes, the scope for discretionary (non-essential) consumption is being compressed by relentless rises in the real costs of essentials, many of which are highly energy-intensive.

Fig. 1

The inability of financial stimulus to reinvigorate the energy economy is the first of at least three popular myths which are poised to fail in the face of reality.

A second is the supposed ability of renewable energy sources (REs) to replace fossil fuel energy without undermining economic prosperity – whilst a “sustainable economy” may indeed be feasible, “sustainable growth” is a pipe-dream.

Neither can we expect the alchemy of technology to triumph over the laws of physics.

From here, and as the financial system draws ever nearer to the trauma of disorderly downsizing, the economy enters an era in which, whilst “collapse” might be avoided, involuntary contraction has become inescapable.


One of the most profound shortcomings in orthodox economics is the mistaken assumption that “prosperity” is coterminous with “money”.

If this were true, it would enable us, through our control of money, to promote perpetual economic expansion, unfettered by any material constraints imposed by the finite nature of the planet in its physical and environmental characteristics.  

We have spent twenty-five years discovering, at enormous cost, that such assumptions are fallacious. Conventional economics, once dubbed “the dismal science”, might or might not be “dismal”, but cannot in any way be considered a science.

Those conclusions which orthodox economists are pleased to call “laws” are, in fact, no more than behavioural observations about the human artefact of money, and are not remotely analogous to the laws of science.

If there is ever to be a science of economics, it will be founded, not in finance, but in thermodynamics.  

Critically, we should dismiss the orthodox insistence that financial demand always creates material supply, in part by promoting substitution. No amount of financial stimulus, and no rise in price, can produce resources which do not exist in nature. We can lend and print money into existence, but we cannot similarly create the low-cost energy without which the economy cannot function.    

The reality is that prosperity is a material concept, understandable only in terms of resources in general, and of the “master resource” of energy in particular.

As a recent reappraisal by Gaya Herrington confirms, the authors of The Limits to Growth (LtG) were right when, back in 1972, they modelled the Earth as an inter-connected system, and found definite material limitations to expansion.

In the narrower fields of economics and finance, it’s becoming ever clearer that we have been living through a quarter-century precursor zone during which the potential for further growth has been exhausted.

What we are experiencing now is the disruption which attends the ending of this transitional phase, and the onset of involuntary economic contraction.

The aim in Part One is to uncover the operative principles of the economy understood in material terms, and to look at how these define the nature and progression of prosperity.

In Part Two, we look at what the application of these principles tells us about the future of the economy and the financial system.


The Surplus Energy Economics interpretation is based on three principles, each of which is fully in accordance both with logic and with observation.

First, the economy is an energy system, because nothing which has any economic utility at all can be produced without the use of energy. This applies, not just to services and manufactured products, but to other natural resources as well, because the supply of these materials is a function of the energy required to make them available.

The second principle is that, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This ‘consumed in access’ component is known here as the Energy Cost of Energy, giving us the principle of ECoE.

Because no unit of energy can be used twice, rises in ECoEs reduce the economic value of any given quantity of energy available to the system. Rising ECoEs also undermine the economics of energy supply, and thus act as a constraint on the quantity, as well as the economic value, of energy available to the economy.

This means that material prosperity is a function of the surplus (ex-ECoE) energy available to the system. Prosperity can be – and, through the SEEDS system, is – quantified and modelled on this basis.  

The third principle is that, lacking any intrinsic worth, money commands value only as a ‘claim’ on the products of the material economy of energy.

Money is thus ‘a human artefact, validated by exchange’. It is not a ‘store of value’, but at best ‘a store of claims to value’. Since money is a claim on energy, debt, as a ‘claim on future money’, is in reality ‘a claim on future energy’.  

We are at liberty to create as many monetary claims as we see fit, but we cannot create the material prosperity required to honour these claims ‘for value’.

Money and money-equivalents created in excess of the deliverability capabilities of the ‘real’ economy of energy are known in SEE as excess claims. Since, by definition, these excess claims cannot be honoured, they must be eliminated, either through repudiation (‘hard’ default) or through an inflationary degradation of the purchasing power of money (‘soft’ default).

To the extent that these claims are regarded by their owners as ‘value’, divergence between aggregate claims and the material economy must result in ‘value destruction’.

What emerges from these principles is the critically important concept of two economies.

One of these is the ‘financial economy’ of monetary claims, and the other is the ‘real economy’ of energy. This conceptual understanding is vital to a meaningful interpretation of economic and financial conditions, trends and prospects.   

For so long as we persist with the time-honoured but fallacious notion of a material economy governed entirely by the immaterial artefact of money, we will continue to make costly mistakes, to cherish expectations which the economy cannot deliver, and to build dangerous risk into a financial system which is wholly predicated on the false assumption of ‘growth in perpetuity’.

ECoE and prosperity

As we have seen, ECoEs are the decisive arbiter of the material prosperity made available by the economy understood as an energy system.

For most of the time from its inception in the symbolic year of 1776, the industrial economy benefited from steady falls in ECoEs. These falls reflected the operation of three positive factors.

The first of these was an expansion in geographic reach, as pioneers scoured the world in search of lower-cost energy resources. The second was economies of scale, a product of the rapid expansion of the energy industries. The third was a steady improvement in the technology of energy extraction, processing and delivery.

The sparsity of data for earlier periods is such that we cannot know what ECoEs were in 1776, when James Watt completed the first truly efficient steam engine, starting the industrial era by enabling us to convert heat into work.

But we do know that ECoEs at that time were very high indeed. Energy operations were small in scale and limited in geographical range, whilst energy accessing technologies were in their infancy.

A long downwards trend then reduced ECoEs to a nadir at or below 1% during a post-1945 quarter-century remarkable for its rate of expansion in economic prosperity.

Latterly, though, ECoEs have turned upwards, largely because, with the benefits of reach and scale maximised, depletion has taken over as the primary driver of the ECoEs of fossil fuels. Depletion describes the way in which lowest-cost resources are used first, leaving costlier alternatives for a ‘later’ which has now arrived.

The overall development of trend ECoEs can be pictured as a stylised parabola, as illustrated in fig. 10 at the end of this report.

The contemporary situation, as shown in fig. 2, is that relentless rises in trend ECoEs are undermining prosperity through a dynamic that cannot be managed in any way by financial policies. Unlike money, low-cost energy can’t be loaned or printed into existence.

SEEDS analysis reveals that the prosperity of the average American has been declining since 2000, and has since (as of 2021) deteriorated by 8%. The ECoE of the United States at the prosperity inflexion-point in 2000 was 5.1% and, as a general observation, this is the approximate level of ECoEs at which prior growth in the prosperity of the Advanced Economies (AEs) of the West goes into reverse.

Emerging Market (EM) economies – by virtue of their lesser complexity, and their consequently lower maintenance demands – enjoy greater ECoE resilience, and prosperity per capita in China might not turn downwards until about 2027, by which time China’s trend ECoE is projected to have reached 13%.

This said, the rate of improvement in Chinese prosperity per capita has decelerated dramatically, and the anticipated increase between 2021 and 2027 is very small indeed (1.6%). The inflexion point calculated for China by SEEDS has moved successively nearer with each iteration of the model.

In some EM countries – including Mexico, South Africa, Argentina, Brazil, Chile and Indonesia – prosperity per person has already started to decrease.

Fig. 2

Globally, and over an extended period, deterioration in Western prosperity has largely been offset by continuing (though decelerating) progress in EM countries. Now, though, this ‘long plateau’ has ended, such that the prosperity of the world’s average person is heading downwards.   

This is an accelerating trend, and the ‘average’ person worldwide is likely to be 7% poorer by 2030, and fully 21% less prosperous in 2040, than he or she was in 2019.

With the economy understood as an energy system, we can recognise that the growth momentum injected into the system by the harnessing of energy from fossil fuels has now faded to a point at which prior growth in material prosperity has gone into reverse.

An almost universal failure (and refusal) to recognise this process poses the greatest single threat to global prosperity, material security and stability, a threat comparable with – and directly linked to – energy-induced deterioration in the environmental and ecological well-being of the planet.

This can NOT be “fixed”

Thus far, very limited (and generally mistaken) acknowledgement of the economy’s energy challenge has met responses founded in wishful thinking and, to be frank about it, outright ignorance.

Current problems have been compared with the energy crises of the 1970s, when sharp rises in the price of oil triggered severe disruption, soaring inflation and a sharp slump in the economy.

In fact, any such comparisons are completely inappropriate. There was no material shortage of petroleum in the 1970s, and price rises were caused entirely by political developments – the Oil Embargo of 1973-74, and the Iranian Revolution of 1978-79 – which fractured the relationship between the major consumers and the major exporters of oil.  

The reality is that, back in the 1970s, global all-sources ECoEs were between 1.3% and 1.8%, at which further growth remained eminently feasible, even in the highly complex Advanced Economies of the West.     

Now, though, trend ECoEs are close to 10%, a level at which prior growth in prosperity must go into reverse, even in less complex, more ECoE-resilient EM countries.  

Of the proposed solutions to energy and associated environmental issues, by far the most absurd is the idea that we can somehow “de-couple” economic prosperity from the use of energy. The case that has been made for “de-coupling” has rightly, and authoritatively, been described as “a haystack without a needle”.

Alternative energy sources offer a more realistic set of solutions, with most hope vested in the development of renewable energy sources (REs) such as wind and solar power. As the ECoEs of fossil fuels continue to rise, there is a compelling economic as well as environmental case for maximising the use of REs.

There is something close to an orthodox “narrative” which depicts REs as the assured driver of a new age of growth. This orthodoxy contends that indefinite continuation of past reductions in the costs of REs will provide a smooth transition to a new era in which ever-cheaper electricity will unite with new technologies to combine environmental sustainability with unlimited economic expansion.

Unfortunately, such expectations are informed by a fundamental fallacy, which is the mistaken assumption that REs can provide a complete quantitative and qualitative replacement for the economic value provided historically by fossil fuels.

This isn’t the case, not least because the material resources required for the expansion and maintenance of REs can only be supplied using the legacy energy from oil, gas and coal.

We do not have, and are most unlikely ever to have, a truly renewable system which obtains its necessary inputs (including steel, concrete, copper, cobalt and lithium) without recourse to fossil fuel energy.

It’s not even clear if these raw materials actually exist in the quantities needed for complete transition. Even if they do exist, the energy required to deploy them does not.

This resource connection necessarily ties the ECoEs of REs to those of fossil fuels. The ECoEs of renewables have fallen, from a high base, but we cannot use the ‘fool’s guideline’ of infinite extrapolation to conclude that energy from REs will become cheaper indefinitely.

Moreover, the technical efficiencies of these energy sources are already close to their theoretical maxima, as set for solar power by the Shockley-Queisser limit, and for wind turbines by Betz’s Law. Even the “green” credentials of renewables are subject to severe qualification.

Over-optimistic expectations for renewables are informed by a contemporary fascination with technology, an attitude which forgets that the potential of technology is bounded by the laws of physics.

In short, the only way in which involuntary contraction in material prosperity could be reversed would be by the discovery (and the rapid deployment) of sources of primary energy whose ECoEs are at or below 5%.

Those of renewables are unlikely ever to be lower than about 12%, and are likely to trend back upwards over time. Conventional nuclear power has an important role to play, as do hydroelectricity and, perhaps, geothermal energy. But none of these is remotely scalable to a point sufficient to replace the low-cost energy hitherto sourced from coal, oil and natural gas.

Even new discoveries (such as practicable nuclear fusion) may not be sufficiently scalable within the necessary time period to prevent a continuing deterioration in prosperity.

To be clear about this, it IS imperative that we maximise the development of renewables – to continue to tie the fortunes of the economy to the deteriorating dynamic of fossil fuels would be to invite, not just irreversible environmental deterioration, but economic ruin.

The mistake all too often made is the fallacious assumption that an RE-based economy somehow “must” be as big as, or bigger than, the fossil-based economy of today.

An understanding of the fallacy of this assumption reveals the distinction between a “sustainable economy”, which may and should be feasible, and the mantra of “sustainable growth”, which is impossible.

The mechanics of self-deception

As we have seen, the mistaken interpretation of the economy as entirely a financial system has fostered the delusion that economic growth can continue in perpetuity, and that “growth” is, in some mystical way, not just an inevitability, but an entitlement.

In reality, rising ECoEs started to undercut the scope for further growth during the 1990s, with trend ECoEs rising from 2.9% in 1990 to 4.2% in 2000. Though economic deceleration was noted – and labelled “secular stagnation” – it was not traced to its cause.

Rather, it was assumed that it must be possible to restore the supposed ‘normality’ of brisk growth by the use of financial policies.

The first of these innovations, known in SEE terminology as “credit adventurism”, was invoked from the mid-1990s, when credit was made easier to access than it had ever been before.

Between 1995 and 2007, whilst reported GDP expanded by 63%, global debt doubled, with each incremental dollar of GDP accompanied by $2.30 of net new debt.

Worse still, almost half of all the recorded “growth” of that period was the purely cosmetic effect of pouring additional liquidity into the system, and then counting the transactional use of that added liquidity as ‘activity’ for the purposes of measuring GDP.

It must be stressed that GDP is a measure, not of material prosperity, but of activity – a very important distinction that is seldom, if ever, made in conventional economic presentation. The ability to create activity without adding value has injected unproductive complexity at every level of the economy.

Divergence between debt and economic output, exacerbated both by asset price inflation and by failures of regulatory oversight, led directly to the crisis of 2008-09.

With grim predictability, the authorities then decided to compound prior mistakes with “monetary adventurism”, undertaken using supposedly “temporary” expedients such as QE and ZIRP.

These had the effect of boosting the expansion of financial claims which included, not just debt, but broader financial system “assets” (which are the liabilities of the government, business and household sectors), and the underfunding of pension commitments.

These responses to the GFC bought some time for the perpetuation of the status quo, but did so at enormous cost. The dangers of ‘moral hazard’ were disregarded, and the necessary linkage between risk and return was broken, whilst the essential process of creative destruction was stymied.

Perhaps worst of all, avowedly “emergency” innovations – which have since become permanent – invited us to operate a ‘capitalist’ economy without the essential pre-requisite of positive real (above inflation) returns on capital.

Quantifying self-delusion

The SEEDS model enables us to put these various processes into a value-referenced framework. Let’s start by analysing what happened between 1999 and 2019, the latter year chosen because it excludes the subsequent distortions created by the coronavirus crisis.

Unless otherwise noted, all global data produced by SEEDS and used here is expressed in international dollars, converted from other currencies using the more meaningful PPP (purchasing power parity) convention, and stated at constant 2021 values.

Between 1999 and 2019, recorded global GDP slightly more than doubled (+110%), increasing by $74 trillion. But debt increased by 180%, rising by $204tn, or $2.75 for each dollar of reported “growth”.

Moreover, we can estimate that this $204tn increase in debt was accompanied by a $275tn rise in other financial liabilities, and a worsening, probably of the order of $150tn, in the shortfall or “gap” in the adequacy of provision for future pensions.

Concentrating on debt alone, SEEDS calculates that “growth” in GDP, mathematically averaging 3.7% between 1999 and 2019, was made possible by borrowing that averaged 10.2% of GDP during that period (see fig. 3).

SEEDS calculates that, stripped of this ‘credit effect’, underlying or ‘clean’ economic output (C-GDP) increased by only $28tn, or 41%, over a period in which reported GDP increased by $74tn, or 110%.

This in turn means that fully 63% of all “growth” recorded between 1999 and 2019 was the cosmetic effect of pushing gargantuan quantities of credit into the system, thereby creating enormous forward excess claims whose elimination, through a process of ‘value destruction’, has now become inescapable.

If we were to include 2020 and 2021 in the calculation – and, as well as debt, to incorporate increases in other financial liabilities (such as those of the shadow banking system), plus worsening shortfalls in pension provision – we would find that each $1 of “growth” since 1999 has been fabricated using close to $10 of incremental forward commitments.

Fig. 3

Measuring prosperity

Underlying economic output, calibrated here as C-GDP, is not the same thing as prosperity, the difference between the two being the first call made on output by the Energy Cost of Energy.

Between 1999 and 2019, trend ECoEs rose from 4.1% to 8.7%. This means that a 41% rise in global aggregate output (C-GDP) translates into an increase of only 34% in aggregate prosperity.

Since world population numbers rose by more than 25% between those years, average prosperity per capita increased by only 6.6%, a far cry from the claimed improvement of 67% in GDP per capita. As of 2021, prosperity per capita was only 5.2% higher than it was back in 1999.

These global numbers disguise extremely divergent geographical experiences. In 2021, prosperity per capita in China was more than double (+276%) what it had been in 1999. But per capita prosperity has declined by 8% in the United States since 2000, and by 10% in Britain since 2004.

The typical pattern revealed by SEEDS modelling of 29 national economies shows that, after prosperity per capita has reached its inflexion-point, initial declines are gradual, but rates of deterioration accelerate thereafter. This worsening in the rate of deterioration reflects compounding processes that will be discussed later.

Prosperity inflexion-points occur later in EM countries than in Advanced Economies, but subsequent declines are more rapid in EM economies.

Essentials and the loss of discretion

To concentrate on top-line prosperity – whether per capita or in aggregate – would be to miss much of the point, because what really matters, where the economy and the circumstances of the individual are concerned, is the relationship between total prosperity and the cost of essentials. Many of these essentials are energy-intensive, meaning that their costs will carry on rising, even as prosperity itself erodes.

The difference between prosperity and the cost of essentials is known in SEE terminology as PXE (prosperity excluding essentials), and this is one of the most important calculations produced by the SEEDS economic model.

PXE is now in decline almost everywhere, even in countries where top-line prosperity has yet to reach its point of inflexion.   

The SEEDS model defines “essentials” as the sum of two components. One of these is household necessities, and the other is public services provided by the government.

These services count as “essential” because the citizen has no day-to-day discretion (choice) about paying for them.

It should be noted that government spending falls into two broad categories. One of these is transfers, involving redistributive payments such as welfare benefits and pensions. These are not included in the SEEDS definition of essentials, because they net out to zero at the aggregate and at the average per capita levels.

The other category of government spending, which is incorporated in the “essentials” definition, is the direct provision of services, such as education, health care and defence.

The definition of a “necessity” varies both geographically and over time. Something which was regarded as a luxury in 1962 or 1992 may be regarded as a necessity in 2022. A product or service considered optional in a poor country may be seen as essential in a wealthier one.

The SEEDS calculation of essentials is thus, necessarily, an estimate, and it’s unlikely that a universal definition of “essential”, applicable irrespective of place and time, could ever be agreed (though the importance of the topic merits intensive examination).

What really matters, though, isn’t the precise definition of a necessity, but the trend in the real cost of the broad category of “essentials”. Many necessities – including water, food, shelter and the transport of people and products – are highly energy-intensive. Accordingly, the costs of essentials have carried on rising even as prosperity itself has gone into decline.

With prosperity eroding and the real costs of essentials rising, SEEDS analysis shows a process of rapid convergence, shown in per capita terms in fig. 4.

Fig. 4

As fig. 4 makes clear, SEEDS projections show an impending point of crossover at which the prosperity of the ‘average’ person falls below his or her cost of essentials.

Two important points should be noted about these projected intersections.

First, we can anticipate re-definition of the term “essential”, with some products and services, now deemed necessities, coming to be seen as discretionary.

This will apply, not just to household necessities, but to public services as well. An example of the former might (and probably will) be a decline in car ownership, and an increased reliance on public transport, within a general reduction in travel. Governments will face the unenviable task of deciding which public services can no longer be afforded.

Second, the projections shown in fig. 4 relate to the ‘average’ person. In practice, some people will retain the scope for discretionary consumption whilst an increasing number of the less fortunate will become unable to afford essentials, at least as these are currently defined.


In Part One of this report, we have looked at how the economy functions as an energy system, at the meaning and quantification of material prosperity, and at the shortcomings of an economic orthodoxy predicated on the false premise that the economy can be explained, managed – and propelled to infinite expansion – on the basis of money alone.

Turning to projections, there are two issues on which energy-based modelling can provide forward visibility in a way consistent with these fundamentals.

One of these is calibration of the relationship between the financial economy of money and credit and the real economy of goods, services, labour and energy.

This reveals a process trending towards a restoration of equilibrium between the two economies of money and energy. This points towards an inevitable, and very probably a disorderly, contraction, of the order of 40%, in the financial system understood, as it must be, as an aggregation of monetary claims on the material prosperity of today and tomorrow.

First, though, we look at trends in overall economic prosperity and its components.

In preference to a conventional approach which defines the economy as the government, business and household sectors, the SEE interpretation concentrates on three functional segments, which are the provision of necessities, capital investment in new and replacement productive capacity, and the consumption of discretionary (non-essential) goods and services.

As we shall see, general expectations of continuing expansion are based, not just on the false assumption of infinite growth, but also on extrapolation of a recent past mispresented by distorted presentation of historic trends.

In other words, consensus projections are based on the indefinite continuity of a past that simply didn’t happen in the way that convention says that it did.

We conclude that, just as material prosperity is trending downwards, the cost of essentials will continue to rise. This is creating compression effects to which businesses will respond along lines described in SEE as the taxonomy of de-growth.

A primary challenge for governments, meanwhile, will be management of the deteriorating affordability of public services, many of which form part of the essentials which the economy provides to its citizens.  

Clarifying underlying trends

If you want to work out where you’re going, it’s rather important to have reliable information about where you’re starting from, and of how you got there.

In economic terms, this is information that orthodox methods cannot provide.

In search of underlying reality, we’ll look at developments between 1999 and 2021, a period which loosely coincides with the prolonged precursor zone preceding the onset of involuntary economic contraction.

Official data says that global real (constant value) economic output, measured as GDP, increased by 116% between 1999 ($68 trillion PPP) and 2021 ($146tn). If these numbers were accurate, they would mean that the world’s average person was 69% better off in 2021 than he or she had been back in 1999.

On this basis, we’re asked to accept that, since the economy expanded at a compound annual rate of around 3.5% (real) between 1999 and 2021, something similar can be relied upon in the future, once the pandemic, and the crisis in Ukraine, are behind us.

It should come as no surprise at all, then, that the long-range consensus is based on rates of growth of between 3.3% and 3.5%, which confirms the prevalence of extrapolation from misunderstood recent history.

As we’ve seen, this interpretation of past trends ignores the fact that GDP, as a measure of activity rather than value, has been inflated, artificially and dramatically, by rapid expansions in debt and other financial commitments. The average person’s share of GDP may have increased by 69% between 1999 and 2021, but his or her share of total debt far more than doubled – rising by 148% – over that period.

The conventional calculation also takes no account of a dramatic rise in trend ECoEs, from 4.1% in 1999 to a growth-crushing 9.4% in 2021.

On an underlying basis which incorporates these critical issues, the SEEDS model shows that global aggregate prosperity increased by only 35% (rather than 116%) between 1999 and 2021. This means that the world’s average person became better off by just 5.2% (rather than the claimed 69%) between those years.

SEEDS analysis informs us that annual growth in prosperity averaged only 1.3% (rather than 3.5%) during that period.

From a forecasting perspective, this enables us to produce two sets of calculations.

One of these, as mentioned earlier, is a calibration of the relationship between the real economy and the financial system.

The other is the ability to revise past trends onto a basis which provides a realistic rather than an optimistically-distorted historic foundation for forward projection.

RRCI – re-basing to prosperity

It should be understood that revising historic numbers is a routine process in economics.

For instance, global GDP rose from a reported $47tn (PPP) in 1999 to $146tn in 2021.

Everyone knows that this nominal increase (of 210%) is misleading, because it ignores inflation. Accordingly, the GDP deflator is applied, revising the 1999 number to $68tn, enabling ‘real’ growth since then to be calculated at 116%.  

Since GDP and its component parts are the generally-accepted basis for forecasts, projections produced by SEEDS need to start with the most recent GDP number, however misleading we know it to be.

This does not, though, mean that we need swallow the mythical growth figures – such as the supposed more-than-doubling of the real size of the world economy between 1999 and 2021 – when we know that the increase in underlying prosperity was only 35%.

Accordingly, we need to restate past nominal numbers on the basis of a more realistic assessment of systemic inflation, replacing the GDP deflator with a more meaningful measure of price changes over time.

This alternative measure is known in SEEDS terminology as the Realised Rate of Comprehensive Inflation (RRCI).  

Global systemic inflation between 1999 and 2021, measured as the annual GDP deflator, is reported at 1.7%. Applied to an annual rate of increase of 5.3% in nominal GDP, this produces a reported rate of real “growth” of just under 3.6%, compounding to 116% over the period as a whole.

As we’ve seen, though, we know that the expansion in prosperity between those years was only 35%, an annual compound rate of increase of less than 1.4%.   

If we accept – for forecasting purposes – the reported rate of growth in nominal (“money of the day”) activity of 5.3%, recognition that prosperity increased at a compound rate of only 1.36% (rather than 3.6%) reveals that the required compound deflator isn’t 1.7%, but 3.87%.

Globally, these RRCI calculations reveal that the purchasing power of money declined, not by the reported 30%, but by 57%, between 1999 and 2021.     

This restatement is consistent, not just with what we might call ‘everyday experience’, but also with the known shortcomings of orthodox inflation calculations.

For a start, we know that the preferred measure of headline inflation – the Consumer Prices Index – has, since the 1990s, been affected (and reduced) by innovations such as substitution, hedonic adjustment and geometric weighting. Studies based on the application of earlier techniques consistently reveal sizeable understatements in the contemporary presentation of consumer inflation.

Moreover, and as its name indicates, CPI measures only inflation as it is experienced by the consumer, thus excluding many other important metrics, one of which is the inflation in the prices of assets, including stocks, bonds and property.

Asset price inflation most emphatically IS relevant to the overall situation, and not just because of its importance to the relationship between a (generally older) demographic which already owns assets, and a (generally younger) group which aspires to acquire them.

A gamut of transactions in the financial system is linked directly to the prices of assets.

The GDP deflator is supposed to overcome some of these shortcomings through the use of chain-linked measures of volume.

But a large part of the economy – most obviously, financial activities such as banking and insurance – simply cannot be measured volumetrically. We can’t, for practical purposes, meaningfully measure activity in financial services in volume terms, simply by counting the numbers of bank statements provided and insurance certificates issued.

Trend reality

The application of RRCI re-basing to economic data is illustrated in fig. 5.

As mentioned earlier, instead of the usual practice of dividing the economy into sectors (government, businesses and households), these charts depict the world economy in the form of segments, which are essentials, discretionary (non-essential) consumption, and investment in new and replacement productive capacity.

In fig. 5, world economic output for 2021 is stated in all three charts at $146tn (PPP), the reported number for that year. In nominal terms, this reflected an increase of 210% since 1999, when current (“money of the day”) GDP was $47tn.

Application of the GDP deflator raises the 1999 number to $68tn at 2021 values, implying subsequent real “growth” of 116%.

On an RRCI, prosperity-referenced basis, however, the 1999 figure rises, not to $68tn, but to $109tn, reducing subsequent expansion to 35%.

The left-hand and central charts project the situation out to 2027 when, according to the consensus, real GDP is expected to have increased by about 22%. This – as we have noted, and as the middle chart reveals – amounts to extrapolation along the lines of the supposed “trend” rate of growth in recent times.

In the right-hand chart, SEEDS data is used to extend the forecasting period out to 2040, by which time economic output is projected to be lower (by 9%) than it was in 2021.

These, of course, are aggregate numbers, which take no account of increases in population numbers. These rose from 6.0 billion in 1999 to 7.7bn in 2021, and may reach a figure just short of 8.9bn by 2040. On this basis, prosperity per capita is projected by SEEDS to be 21% lower in 2040 than it was in 2021.

Fig. 5

Scoping the future

In fig. 6, SEEDS analysis is used to compare two versions of economic output for the global, American and British economies. In each case, reported 2021 GDP is accepted as a common start-point, even though we know that this is a ‘financial economy’ data-point which is at variance with the underlying ‘real economy’.

In each case¸ the RRCI-based SEEDS trend-line, shown in blue, starts from higher historical levels than those shown in the official ‘real’ equivalent shown in black. It readily becomes apparent that the consensus¸ framed as a continuation of the supposed past, extrapolates from a history that didn’t actually happen.     

If you believe, for example, that the American economy had, prior to 2020, been expanding at an annual trend real rate of 2.1%, there’s a superficial basis for believing that it will carry on growing at much the same supposed rate, such that GDP will be 13% higher in 2027 than it was in 2021.

The underlying situation, though, is that American prosperity actually expanded at only 0.5% annually between 1999 and 2019, and that even this slow rate of increase has been decelerating.   

The British situation is even less robust, with reported trend growth (of 1.8%) between 1999 and 2021 falling to just 0.3% on an underlying basis.

In both countries, underlying rates of growth in prosperity have, over a lengthy period, been lower than the trend increase in population, which expanded by 0.8% annually in the United States, and by 0.7% annually in the United Kingdom, between 1999 and 2021.

This leads us to an observational conclusion, which is that, if the average or ‘ordinary’ person in most Western countries thinks that he or she has been getting poorer (as well as more indebted) in recent times – rather than more prosperous, as asserted by the official view – the strong probability is that his or her perception is correct.

Fig. 6

It would be hard to over-state the significance of this interpretation, but it becomes of even greater importance when we recognise two other underlying realities.

The first is that divergence between the ‘real’ and the ‘financial’ economies has now reached a point at which even the myth of continuing growth has become untenable.

Mistaken presentation of past trends contributes to an unjustified confidence in the ability of the economy to carry – and, in due course, to honour – its gargantuan financial commitments.

The taxonomy of contraction

The second is that, whilst trends in prosperity per capita have adopted (or, in some economies, are soon to adopt) a trajectory of decline, the real cost of essentials is continuing to rise.

Using methodologies described earlier, fig. 7 sets out economic projections for America, Britain and South Korea, subdivided into essentials, investment in new and replacement productive capacity, and the affordability of discretionary consumption.

It should be stressed that each chart presents aggregates, and that adverse trends are more pronounced at the per capita level. It should also be emphasised that the projections for other countries follow broadly similar patterns.

In each instance¸ prosperity is trending downwards. Even aggregate prosperity is now at the point of inflexion in the United States, whilst the rate of decline in Britain has become relentless.

Likewise, the real costs of essentials are trending upwards.

Together, these processes are compressing both investment capability and discretionary affordability, which are the residuals in the equation.     

Stated at constant 2021 values, PXE – the residual difference between prosperity and essentials – is, by 2030, projected to be 14% lower in South Korea, 22% lower in America and 28% lower in Britain than it was in 2021.

Fig. 7

PXE is an indicator of the scope that exists for discretionary consumption and capital investment over time, and it should be said at once that neither of these segments can continue to be propped artificially by credit and monetary subsidy, as has been the case in the past.

This in turn means that, although the entire economy is exposed to the consequences of involuntary contraction, sectors supplying non-essential goods and services will be in the eye of the storm.

It would not be appropriate to specify activities or sectors here. The operative principle, though, can be likened to a household in which decreasing resources, and the rising costs of essentials, compel a reduction in discretionary purchasing.

Of course, no enterprise – whether it supplies discretionaries or essentials – can be expected simply to sit back and let this happen. Beyond general considerations of rising costs and decreasing revenues, there are two particular issues with which businesses will have to grapple.

One of these is a decline in utilization rates – as sales volumes decrease, fixed costs need to be spread across a diminishing number of customers. Passing on these rises in unit costs is likely to result in price increases which exacerbate the rate at which customers and revenues are lost.

The second is a loss of critical mass. As suppliers fail, or reduce the range of goods and services which they offer, a widening range of necessary inputs will either rise in price, or cease to be available at all.

Together, these two processes can be expected to worsen the rate at which economic prosperity declines. These compounding factors help explain why deterioration in prosperity is an accelerating process.

For businesses, the obvious response is simplification, both of product ranges and of supply processes. This will lead to de-layering, as some stages in the production process are eliminated altogether, or are reduced in scale to the point at which they are rendered uneconomic.

What we’re describing here is a process of de-complexification. As the industrial economy expanded, it also became progressively more complex, introducing wholly new activities, many of them very large, which did not exist in the earlier, smaller and less complex economy.

Together, decreasing utilization rates, loss of critical mass, simplification, de-layering and de-complexification form what is known in SEE terminology as the taxonomy of de-growth, though ‘contraction’ might be a more appropriate term than ‘de-growth’ for the description of trends which are part of an involuntary reduction in the scale and complexity of economic activity.

Financial contraction

With two vital concepts understood – the two economies, and the role of money as claim – it becomes apparent that rapid (and very probably disorderly) contraction is to be anticipated in the financial system.

There are many sectors in which the confidence of investors and lenders could very rapidly ebb away.

Calibration of these trends relies on two calculations. One of these is percentage exposure, meaning the gap that divides the ‘financial economy’ of money from the ‘real’ economy of energy, goods and services.

The widening of this gap has already progressed far enough to trigger a sharp and systemic upturn in inflation, a process which largely precludes any continuation of that reliance on “stimulus” which has characterised economic crisis-management over a remarkably prolonged period.

Whilst raising rates might not tame inflation – and perhaps nothing can – central bank inaction, allowing real rates to go ever deeper into negative territory, might not be tenable either.

It is not the purpose of this report to draw detailed comparisons between economies, but fig. 8 illustrates that percentage exposure is frighteningly larger in China (-54%), and markedly smaller in Italy (-10%), than in the United States (-32%), or in the world economy as a whole (-40%).    

Fig. 8

In any case, percentage downside is really meaningful only when applied to the proportionate size of the financial system which – within the principle of ‘money as claim’ – needs to be understood in terms of liabilities.

Globally, and stated at constant 2021 values, debt has soared from $113tn (PPP) in 1999 to a provisional $360tn at the end of 2021. Though the ratio of debt-to-GDP has risen to ‘only’ 240% now (from 166% in 1999), the way in which increases in debt inflate activity reported as GDP means that a linkage between numerator and denominator results in a progressive understatement of this oft-cited ratio.

Referenced to prosperity rather than GDP, the debt ratio today rises to over 400%, compared with a similarly-calibrated 175% back in 1999.

Much the same applies to financial assets, which are the counterpart of liabilities in the government, corporate and household sectors of the economy. On the basis of data available for countries accounting for about three-quarters of the world economy, we can estimate that these liabilities, which include those of the shadow banking system, may now equate to at least 930% of prosperity (and about 550% of GDP), compared with 440% of prosperity in 2002.

Inadequacies (“gaps”) in pension provision are harder to calculate, but available data suggests that these might now have risen to about 3x global prosperity, a sharp increase powered, at least in part, by policy-induced crushing of returns on invested capital.

Within the charts shown in fig. 9, it must be understood that we have only limited data on financial assets globally, and still less on the inadequacy of pension provision. The latter, in any case, tends to be referenced, not to firm commitments, but to general expectations, with global pension provision tending to be financed from government revenues rather than from funded provision.

Even so, we can conclude that, following a prolonged period in which forward claims have been increased exponentially in order to sustain a cosmetic simulacrum of “growth”, systemic risk has become enormous within an economy increasingly dependent on, and addicted to, a continuity of breakneck expansion of financial commitments, commitments which might have become impossible to honour ‘for value’ even if the material prosperity of the global economy hadn’t ceased growing, and started to contract.     

Fig. 9


It’s been well said that people have a strong inclination towards believing what they want to believe.

Even so, the extent of contemporary misunderstanding about our true economic and financial predicament can only be described as staggering.

The consensus view remains that current problems combine the lasting effects of the coronavirus crisis with the more recent stresses created by the war in Ukraine. The assumption, seemingly shared at all levels of opinion, is that, as and when these disruptions recede into history, “growth” will return, inflation will fall back to pre-crisis levels, and there need be no re-run of the financial crisis of 2008-09.

This consensus “narrative” is based on at least three critical misconceptions.

The first of these misconceptions is that “growth” can be maintained indefinitely in the future, as it supposedly has been in the past, through the operation of financial policies.

This view not only exemplifies the fallacious orthodoxy that the economy is entirely a financial system, but further ignores the reality of a recent past in which the simulacrum of “growth” has been manufactured by the relentless creation of forward commitments which cannot possibly be honoured ‘for value’.

The second misconception is that we can make a seamless transition from fossil fuels to renewable sources of energy without impairing the performance of the economy. Whilst imperative in environmental terms, this transition cannot replace the economic value hitherto provided by oil, gas and coal. The material resources to accomplish this transition, where they exist at all, can only be provided courtesy of legacy energy from fossil fuels.

Informing both of these is a third misconception which rests on remarkably over-sanguine expectations for technology. Ultimately, the scope of technology is bounded by the limits of physics in general, and thermodynamics in particular.

When we see past these misconceptions, what emerges is an economy poised for severe contraction because of (a) the depletion of the low-cost fossil fuel energy which has powered the industrial sage, (b) the absence of any plausible replacement for this low-ECoE energy, and (c) the sheer idiocy of the idea that we can somehow “de-couple” economic prosperity from the supply, value and cost of energy.

This gap between reality and misconception poses enormous risks for a financial system which has created gargantuan ‘forward claims’ that cannot possibly be delivered. These excess claims will have to be repudiated, through default, through runaway inflation, or a combination of both. This inevitable process of disorderly downside on the claims side of the equation has obvious implications for asset prices which have been inflated, often to the point of absurdity, through a period of ultimately-futile policy gimmickry.

Based on the same misconceptions which distort collective understanding of the economy and the financial system, it is widely assumed that existing political and social arrangements, and the intellectual dogmas that support them, will evolve only very gradually from where they are today.

We have reasonable grounds for concluding that this consensus view is shared by leadership cadres in government, business and finance. Whilst it is fashionable to question the candour of politicians, we can state with confidence that, if business bosses and investors really did have serious doubts about the validity of the consensus “narrative”, these doubts would already have become apparent, not least in corporate strategies and, most obviously, in the markets.

What we cannot calculate is the moment at which reality displaces all of these fondly-cherished delusions, economic, financial and political. A purely personal view – and an admittedly somewhat subjective one – is that we are now very close indeed to the moment at which the myth of perpetual growth succumbs to the hard facts of an economy heading into contraction; a financial system, built on false predicates, trips into a crisis of disorderly downsizing; and the public demands pragmatic responses to challenges which its leaders, perhaps in all good faith, have hitherto refused even to acknowledge.    

Fig. 10

62 thoughts on “#228. In the eye of the Perfect Storm

  1. There’s nothing wrong with reminding people Tim.

    You only have to look at comments from a lot of the readership of paper like the Daily Telegraph and Mail that many still cannot accept the reality of the situation.

    • Thanks. The aim with this one is to summarise where we are and what we know, and it might form the basis of a downloadable report for anyone new to the subject or interested in it.

      I’m quite convinced that the time for theorizing is very nearly over, that things are going to turn very nasty very quickly, hence the need for a relatively comprehensive summary.

  2. Excellent report Dr. Morgan!

    I am reminded of Philip K. Dick’s observation: “Reality is that which, when you stop believing in it, doesn’t go away”

    I hope that our leadership class gets it before it’s too late

    • Thanks Raymond.

      I really think that they simply don’t get it. If they did understand it, so would at least the big investors, and markets (and some sectors in particular) would already have crashed.

  3. Very neat article, and it acts as a nice overview.

    If I read what you wrote correctly, we should see our remaining fossil fuels as the seed grain for our energy transition. However, it seems to me that for now, the EcoE of fossils being lower than the one of RE, we have a dis-invective to do so.

    But by waiting into performing such pivot, we are pushing back such transition to a point in time where the available surplus energy will seriously put a cat to the level of investment that may be sustained.

    Which is to say that countries choosing to invest now at the expense of a faster short term discretionary squeeze, will be much better off long term compared to the countries eating the seed grain so to speak. Do I get this right ?

    • Thanks.

      Yes, there’s a case for early investment in REs, and also in nuclear.

      The biggest challenge, though, is to connect expectations with the possible.

  4. Dr. Morgan
    An excellent paper. Three quick notes:
    *There is macroeconomics and microeconomics. Your dismissal of macro economics is right on the money, but microeconomics is likely to play a large role in government and social developments. Absent wildly successful methods for using something other that fiat currencies to grease exchange, government monetary policies and fiscal policies and debt default laws will have an enormous bearing on the distribution of earnings and assets across the population. Microeconomics has historically been seen as dealing with “scarcity”. And our macro environment is likely to generate more scarcity than we care to think about.
    *The sciences of human behavior are likely to become much more significant even than they are today. The boom in “information” corporations is a result of scientific understanding of how to manipulate people for profit coupled with a huge increase in the data on individual behaviors which can be used to infer points of weakness to leverage sales (or votes, if one is a politician).
    *While politicians are loath to think or act domestically in response to the deterioration in prosperity, I suggest that the Security States are well aware of the probable trends. In the US, newly elected officials get a pretty good introduction to Reality 101. As one example, Kamala Harris, the Vice President, was asked about the shortage of oil. She remarked that “oil is important, but the real shortage is water”. That sounds to me like she just came out of a resource security briefing with the CIA or similar officials. The second piece of evidence is the statements by previously clueless politicians who actually get elected as to the critical importance to the US of the petro-dollar. In short, I suggest that more important than “educating” the politicians is developing some sort of “feasible adjacent” strategy that they can get behind. As one example, suppose that governments limited the use of debt in favor of equity. Then a corporation could run out of money but it wouldn’t be ruined because of unplayable debts. The same notion might be extended to government pensions, which could be stated as a percentage of one of the measurements you propose. Accepting the instability of the currency as a marker of ability to pay in a shrinking economy.

  5. I feel like the consequences of the inevitable rise in authoritarianism worldwide to keep the disgruntled populace under control may void any planning (eg buy farm land to get it seized? a ban on growing food for self consumption or who knows). These are frustrating times, one can only mostly watch.

  6. Hi Tim,
    I always forward your articles to my daughter (she graduated last year in economics at UCSB), but sadly, she doesn’t get it. Your comment that economics should be a category of thermodynamics hence included in the physics department is apt. My daughter and her friends from the physics dept. are all too busy in their high paying jobs to notice or collaborate, (driving teslas to go snowboarding), so I will remain your devoted reader, semi retired and living the dream and watching it all unfold. I can’t wait till the youngsters take notice but it may be awhile because they are all doing so well.

  7. Nate Hagens and Simon Michaux
    Another great interview featuring conversation between two smart and informed people:

    I will highlight only a few of the points:
    *Simon is working for the government of Finland. His professional opinion is that our current 19 terawatt global economy needs to shrink to 10 terawatts. Parenthetically, he states that the smart money is on 5 terawatts.
    *He has talked with the people behind the construction of gigafactories to power electric vehicles in Europe. You will find the results around the 36 minute mark.
    *There are no politically acceptable answers to the impossibility of achieving the goals
    *At one hour, the conversations slides into why there is so much misinformation and lack of understanding. One part is that we are ruled by psychopaths. Another part is that we, just like all other animals, are ruled by dopamine. However, in his final conclusion, and particularly as it affects his two daughters, he says that this generation is the best equipped to deal with reality, although a large percentage will not be able to deal productively to resolve the problems and transition to what comes next. He thinks that 2030 is a critical date by which we have to have charted a new course.

    Now, I will put in my two cents. “There are no politically acceptable answers”, and so the politicians are evaluating their alternatives. To my mind, the “psychopaths in charge” have looked at the impossibility of doing what they have promised to do. They can’t do it, as Simon points out, in part because of the bottlenecks posed by Russia and China. So, my guess is that they have decided to do whatever it takes and risk total destruction in order to reduce Russia and China to colonial status. I have no particular opinion on how that may turn out.

    This reminds me of an old morality tale from the 1960s corporate world. You are the chief accounting officer in a large company. You steal a hundred million dollars through bookkeeping fraud. You spend 50 million on wine, women, and song and houses on tropical beaches. Then, you begin to suspect that the auditors are smelling a rat. What is the proper response?
    *Give back the remaining 50 million and plead for mercy
    *Go to Las Vegas and put the 50 million at risk in one roll on the roulette wheel.
    The correct answer is the second option. If you do the first, you will be fired in disgrace, and sued for whatever material goods you possess. But if you do the second, you have nearly half a chance of leaving Las Vegas with a hundred million. And if you lose in Vegas, you are no worse off than if you had given back the remaining money. If you win in Vegas, you do some creative bookkeeping to show an “overlooked cash account”. The auditors are suspicious, but they have no proof. Because their jobs depend partly on your good will, they keep their silence. Translated to Europe, having committed your countries to a suicidal strategy, and facing severe blowback from a suffering electorate, do you risk losing everything in a nuclear war or do you spin the wheel? The best payoff may well be spinning the wheel.

    Don Stewart

    • In terms of what’s “politically acceptable”, I’m quite convinced that political leaders don’t understand what’s really happening.

      I’m not advancing this as a justification, because they should make it their business to find out. Neither is it any excuse that markets haven’t worked it out yet either, because markets might be very close to doing exactly that. Governments ought to have access to the best possible range of expert advice.

      I’m neutral on party politics, but I find it hard to fathom what the current administrations in London and Washington – in particular – are trying to do. There are reports that the UK is contemplating a “trade war” with the EU which, if true, would be madness. I’m no admirer of Mr Trump, but, if Mr Biden has a strategy right now, it’s hard to work out what it is.

      Do these people really think that, if it hadn’t been for bad luck – covid, followed by Russia/Ukraine – everything would have been fine and dandy? Do they really think we can power an industrial economy with windmills, and we can replace a billion cars with EVs?

    • “In terms of what’s “politically acceptable”, I’m quite convinced that political leaders don’t understand what’s really happening.”

      Can you supply evidence for this assertion? I think their actions speak of the exact opposite. Heck the WEF was making tweets about how during coronavirus our cities were so much quieter without any of us “living” and how oil consumption is down and you know, the whole line about owning nothing by 2030 and liking it. Maybe you and I are watching two entirely different TV shows?

    • Also, do political “leaders” really even make policy? The evidence tends to lean towards the lobbyists write the bills and then the “leaders” create theater around them. Remember during the Obama care debate Nancy Pelosi stating we had to pass the bill to find out what was in it? Or the Trans pacific or atlantic bills that would have essentially abrogated sovereignty to corporations? Or the current treaty handing over public health policy to the WHO?

    • All of these would tend to suggest that our “leaders” (corporations and not politicians) see trouble ahead and feel the need to remove the democratic process charade completely from the theater. That to me points to some sort of awareness.

    • “The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.” – Frank Zappa

  8. This is a very nice summary and I agree 100% that the extent to which energy issues underlie our economic woes is vastly underestimated, so I support your efforts to change that.

    I wonder about what would happen in a sci-fi esque world where nobody ever travels anywhere for any reason, because people spend their life just hooked up to VR, living virtually. In that extreme case, you would still need enough energy to feed and house everyone, and keep the VR running, but you wouldn’t need much else.

    And then I think, aren’t we already mitigating our decline in much this way already? What are the biggest companies that didn’t exist a few decades ago, Google, Facebook, Twitter, Netflix. None of these companies make a material product, they are all just providers within the virtual world of the internet. The biggest company, Apple, makes the products that people use to access the internet.

    I think that in order to claim growth, much as what is happening is a diversion of activity from the material world which can no longer grow to any significant extent, to the virtual world, where things can ”grow’ almost indefinitely without taking up much more in the way of physical resources.

    Economists talk about the ‘Information economy’ and I guess that people living in the matrix/meta-verse is what they have in mind (whether they realize it or not) when they talk about ‘de-coupling’ economic growth from physical consumption.

    Information, or ‘data’ at least, can expand almost indefinitely in this manner, so by maintaining an appropriately restrictive level of ‘intellectual property’ rights on it so that people have to pay for this data/software/subscription to apps/etc., the combination of money printing and expanded payments for virtual/data items can create the appearance that GDP continues to increase, even as more and more people struggle to pay for the (material) essentials in life.

    • Thank you, welcome, and you raise some very interesting points.

      It takes a lot of energy to run information-tech, but it’s true, of course, that less energy is used by somebody enjoying a ‘virtual holiday’ at home than by travelling to Rio, or wherever. It might not be an experience of equivalent value to the consumer, but could be a substitute if the ‘actual reality’ vacation has ceased to be feasible or affordable.

      The question, though, is still about how it is paid for, a problem for all discretionary sectors. The subscription or, as I term it, ‘streams of income’ model is already faltering, and there have to be questions about the ad-funded model as discretionary consumption contracts.

      Your last point, about GDP, is a particularly good one, and relates to how we’ve been faking “growth” over a very extended period. I don’t doubt that efforts will be made to, as you put, “create the appearance” of GDP growth, but we do, ultimately, come down to the viability of money, and the plight of an increasing number of people being unable to afford the essentials.

    • Re dematerialization of the economy, the devices enabling the VR experiences seem to become inadequate after around five years. Most end up in landfills within a decade, even if traded in for a second use. The minerals required to manufacture new ones are mined using FFs. Transport, processing, manufacturing…all require energy. Dematerialization is vastly overrated!

  9. Thanks Tim as ever for your work. I saw this via Moon of Alabama (via the Duran) on a very neat explanation on the current energy war.

    US strategists saw Russia as the best opportunity for isolation, both from China and from the NATO Eurozone. A sequence of increasingly severe – and hopefully fatal – sanctions against Russia was drawn up to block NATO from trading with it. All that was needed to ignite the geopolitical earthquake was a casus belli.

    That was arranged easily enough. The New Cold War could have been launched in the Near East – over resistance to America’s grab of Iraqi oil fields, or against Iran and countries helping it survive economically, or in East Africa. Plans for coups, color revolutions and regime change have been drawn up for all these areas, and America’s African army has been built up especially fast over the past year or two. But Ukraine has been under attack for eight years, since the 2014 Maidan coup, and offered the chance for the greatest first victory in this confrontation against China, Russia and their allies.

    So the Russian-speaking Donetsk and Luhansk regions were shelled with increasing intensity, and when Russia still refrained from responding, plans reportedly were drawn up for a great showdown last February – a heavy Western Ukrainian attack organized by U.S. advisors and armed by NATO.

    Russia’s defense of the two Eastern Ukrainian provinces and its subsequent military destruction of the Ukrainian army, navy and air force over the past two months has been used as an excuse to start imposing the U.S.-designed sanctions program that we are seeing unfolding today. Western Europe has gone along whole-hog. Instead of buying Russian gas, oil and food grains, it will buy these from the United States, along with sharply increased arms imports.

    The world economy is being enflamed, and the United States has prepared for a military response and weaponization of its own oil and agricultural export trade, arms trade and demands for countries to choose which side of the New Iron Curtain they wish to join.


    • Thanks. I have to say that I’m sceptical about these sorts of theories, but I admit that they are given some credence by the seemingly otherwise-irrational behaviour of governments.

      It seems to me that there are no coherent strategies where the West, at least, is concerned. I believe that governments either don’t – or don’t want to – understand the realities of the economic situation. Banning energy imports from Russia seems foolhardy, to put it mildly. Does anyone realise that Russia will still exist – and will still be a very important country – when all of this is over? In other words, we will have to negotiate, whether we like it or not.

      So we come down to “knaves or fools?” – with folly looking more plausible, to me, than knavery!

  10. From JMG’s blog today –

    I’d have to patiently remind them that Rome wasn’t sacked in a day—that it takes years of breathtakingly moronic decisions motivated by mindless greed, vicious partisan hatred, blind ideological dogmatism, and a total unwillingness to think about the long-term consequences of short-term decisions, to bring a civilization down.

  11. Excellent thought-provoking analysis that fits experience. In particular, it destroys the myth that ‘renewables’ are the solution.
    To partly counteract the gloom, though, there is the profound and accelerating trend of ‘doing more with less’, whereby both services and manufactures can be produced more efficiently, not least in energy terms, albeit the clear limits physics imposes whereby you can reduce energy inputs only so far. Primary here is the far more efficient form of nuclear fission power provided by ‘breeder’ reactors, which recycle their own fuel; NOT nuclear fusion, though, as it looks like stable nuclear fusion is a non-existent phenomenon — that is, its doesn’t occur in nature and can’t be artificially created.
    There’s also an upside that actually comes out of inevitable economic contraction: we won’t so easily be able to quarantine ourselves individually in our separate living and moving boxes, and instead we will have to revert to the status quo ante of mutual reliance in family and much more local network — not least the multi-generational family home (grandma as well as stay-at-home adult offspring). A more natural human sociality will be reinstated, and that’s an extraordinarily good thing compared to the anomie of today.

  12. If people in advanced industrial nations can expect to get about 2% poorer for the rest of their lives, what role would a -40% correction in imaginary finacial wealth play in that? Would we be starting at -40 and then shrink -2 from there?

    • These are different things.

      Prosperity is a material concept, though it’s expressed here in money because that’s the common language in which economics is debated.

      The financial system, on the other hand, is an aggregation of claims on the future – future repayments by borrowers, future earnings and dividends from companies, pensions that people expect to receive in the future.

      So in that sense the scale of the financial system is a function of collective expectations. Those expectations are grossly over-inflated, because (a) people don’t understand what’s really happening in the present, and (b) their expectations for the future are ludicrously over-optimistic.

      As perceptions of the present and the future change, so does the financial system. My view is that we’re heading for a financial crash.

    • So that irrespective of that crash we’d be talking about the average person getting progressively poorer with regard to real prosperity calculated in your cleaned-up data.

      What then is it that gets corrected, and do you have any sense about how the hurt will be distributed amongst income levels? The poor have little to loose, but are the middle classes more or less exposed to illusionary wealth corrections than the rich? Who has overextended themselves more, relatively speaking?

    • Thanks.

      When we think about “the rich”, we tend to reference those with huge stockholdings, meaning that this is paper wealth, capable of falling very rapidly if markets slump, which seems likely to happen. Even within this group, it will depend what they are invested in, and how much debt has been secured against their assets.

      Even so, I’d have to say that the middle classes are the most exposed. I’d put it like this. In earlier times, if you drove past a big house with two expensive cars parked outside, you could assume that the occupants were wealthy. Nowadays, though, they might just have very large debts. The reality probably lies somewhere between these extremes.

    • The degree to which the middle class has tied both its emotional and financial future to the discretionary sector does not bode well for the political future of our nations.

      Last time a discretionary sector of even remotely similar size existed, people were still skillfully employing tools that could be re-machined. Not this time.

      Thank you.

  13. Thank you Dr Tim, your papers and SEEDS model make perfect sense to me. What I would question though, is your assertion that governments have misunderstood the situation. It seems to me that the demonstrably fraudulent covid pandemic and the remarkably coordinated global response to it, tearing up standard pandemic response plans in the process, makes sense when considered as a strategy to impose authoritarian control over populations in order to prevent a disorderly collapse.

    I predict that we will see more “pandemics” and other international emergencies where populations can be controlled and manipulated by maintaining a state of fear.

    • Andy:

      Thanks. This is something that I’ve always steered rather clear of, partly for lack of evidence, partly because I’m a sceptic of conspiracy interpretations, but mainly because I prefer to concentrate – in a neutral and non-partisan way – on the economy. I accept that governments have become increasingly authoritarian, but there are a number of plausible explanations for this lamentable trend.

      I feel that the political class might fear crises without necessarily understanding economic issues as we understand them here. One could easily fear the ending of financialised/globalised neoliberalism without understanding the ‘two economies’, money as ‘claim’, ECoEs, the limits of renewables, the impotence of technology, and so on.

      When I look at leadership cadres, I don’t see heirs to Alexander and Napoleon but, to be brutal about it, a lot of ‘cut-price Cromwells, aspiring Canutes and muddlers-through’.

  14. “What then is it that gets corrected?”
    I think the obvious answer is population.
    Because of too few resources available to support the current human population.
    Because of the environment becoming less and less inhabitable, due to climate change.
    The current human population will get corrected.

    “How the hurt will be distributed amongst income levels?”
    Those without financial debt loads and who have prepared accordingly, will fare much better.

  15. >>It would not be appropriate to specify activities or sectors here.

    Curious why not? This is one aspect I’m very interested in – trying to navigate my feeble savings through this all.
    Might there be any suggested reading along these lines?

    • I think that at this point answering that question would be very usefull on many levels.

      It looks like a typical 2×2, with usefullness* of a product on one axis and energy intensity on the other.

      A company manufacturing dishwasher will likely be arround for much longer than the one producing plastic dino toy if
      I can hazard a guess. Anything described by “Premium mediocre” will likely be going first.

      If you find good sources, I’d be interested. I’ll have a looksee on my side.

    • JH,
      I’m trying to put ideas down on paper. My writings about this are linked on my username (I don’t want to outright spam this thread).
      Your thinking is along the same lines as mine. But I also try and focus on what I consider traps. I.e. investing in oil companies themselves.
      I’ve read a ton of PO blogs and books since 2004/5 period. Here’s where I’m at:
      Avoid: Oil majors (political backlash / intl. oil field nationalization risk / depletion; no company with no oil left )
      Avoid also: Mining cos. Including gold/silver. Best ores are depleted. We’re down to Ore qualities that are reliant on fossil fuels to extract.
      Buy: Defense contractors (resource wars inevitable)
      Consumer Staples (self explanatory here on this blog – I also suspect there will be more ‘stimmies’. small UBI even to keep riots down)
      Utilities (same logic as defensive consumers – NOTE: I’m wary here due to potential nationalization when politics gets crazy. that evil electric & natgas co price gouging)
      Railroads ( IMO, it’s inevitable most trucking volume makes it to them. 3x efficient per mile. plus eventually subject to Green energy electrification subsidies from gov)
      Farmland (I’m not accredited, so FPI and LAND. But I suspect they’re highly leveraged. Also they flip properties.)

      Smaller % allocation ideas:
      Timber Reits (back to our roots)
      ECL (water)
      WM (their recycling biz might thrive if miners can’t mine)

      I’ve read multiple gov oil rationing plans from the 70s. They all prioritized oil to farming/food processing:

  16. @Adrian Bailey
    I was working on a project and was slow to check your reference to JMG. Turns out he is in full crisis mode. The US Government antagonizing everyone, the world running out of affordable oil, etc. He is recommending old manuals on “do it yourself repairs”….but I am afraid the reality is that most products now are designed to be unrepairable (led by Apple).

    Whenever JMG trots out the long decline of Rome, I want to ask about the dramatic and rapid decline and fall of the Third Reich. Stupidity and over-reaching can bring on a Seneca Cliff with breathtaking speed.

    It’s really hard to parse the future right at the moment. But I don’t think the signs are positive for the US and Europe.

    Thanks for reminding me to check JMG’s blog….Don Stewart

    • @Don Stewart,
      To be fair to JMG, he’s been discussing a ‘slow descent’ since I started reading his original Blog at the time of the GFC – as many others have pointed out, what was a slow descent has accelerated this year, the degree of which has yet to hit many, but come year end expect much howling shall I say!

    • I’ve just read JMG’s latest, and I, too, notice an acceleration, or a greater sense of urgency.

      I don’t know about JMG, but my own preferred approach to situations is to be calm, objective, measured and analytical. I know it’s a cliche, but ‘hot times’ really do ‘need cool heads’.

      I’m certainly sensing an acceleration, and even an edge of panic, in current events. That’s why this latest article here has been aimed at summing up what we know, and what we can reasonably infer.

    • JMG has a ragged stair step down model. Things get worse than they stabilize for a while then there is another step down etc. etc.
      It does seem that many people are sensing that a big change is upon us. And it would seem to me that the first step down is going to be a big one. That is because, our current banking system has to break – it can not function in an economy that is undergoing long term decline.
      And i do not know if anyone has an idea on how to operate a financial system in an economy of decline.

    • You’ve highlighted one of my main concerns, because the financial system is ‘like a car that has poor steering, iffy brakes and no reverse gear‘.

      I don’t see how it can change direction from here, but a way needs to be found. Finance is reliant on ‘futurity’, by which I mean a collective view of the future.

      Right now, that ‘futurity’ is ‘infinite growth, albeit with temporary setbacks’, which seems to me untenable. I’ve said often before that the financial system is “wholly predicated on continuous growth”.

  17. “to be brutal about it, a lot of ‘cut-price Cromwells, aspiring Canutes and muddlers-through’.”
    Spot on! The few politicians I know, and it’s very few, seem to understand limits they just don’t seem to get diminishing returns on a finite resource. They seem to think that as long as the wells are producing everything will remain status quo. Never knowing that there is a difference in oil quality at the well head. Not all oil produced is equal. The most important bit, kerosene/diesel is getting scarce and no amount of tinkering will change what’s left in the ground. They also don’t seem to realize that to get x% of growth you need to increase the fuel supply by a corresponding % of new oil to the daily total. Oil!, we don’t need no stinking oil, we have wind mills and solar panels! Don’t get me wrong I have solar panels and am mostly off grid, (still using propane for cooking and hot water). I’ve been off grid since 2006 so I have some feeling for what can and can’t be run on the sun and when! As far as wind goes it is less useful than panels in my experience. Too much variability and short life span. They’re mechanical as well which means regular maintenance, but getting to these remote places with personnel and parts is going to happen on/in santa’s sleigh maybe? The military industrial complex will soak up the last of it in any case. Maybe that we can plant our crops in the holes left by the war machine and use the tanks to harrow the crops, because I can’t see TPTB allowing the tractors to run while the tanks sit without fuel. Field work will be the new norm. Have a look at one possible near future, a minute and a half: https://www.youtube.com/watch?v=tOauOJg-fCQ&t=28s

    • Perhaps Disraeli said it best – “Damn your principles! Stick to your party!”

      I’ve met quite a few politicians over the years, and one of the things that strikes me is that it’s like a sports event – competitive, in the sense of ‘coming out on top’ against ‘the other team’. That can include being ‘less useless than the other lot’. To some extent voters support this – how many people actually voted ‘for’ Joe Biden, or ‘for’ Boris Johnson, say, rather than against Donald Trump or Jeremy Corbyn?

      Politicians tend to be rather like the rest of us, perhaps with bigger egos. Some (quite a lot, actually) are decent, well-intentioned people, others are schemers driven by ambition. Most are probably not as cynical as they are often portrayed as being, but few of them are particularly bright (though some are ‘clever’, which isn’t the same thing). They tend to live in a bit of a bubble.

      Politics isn’t the same thing as leadership. Winston Churchill provided leadership. He made a lot of mistakes and, given the chance, would have made more, and he had a number of striking weaknesses, but was nevertheless a very effective leader, in war-time anyway. Political systems tend to produce few real leaders, but few real idiots.

  18. Reality closes down a lot of politicians, RV’s, and commenters.

    ‘A beautiful deleveraging’.


    Just a thought; will the current msm monkey pocks hype be used to prevent millions of starving Africans from entering Europe? Another narrative?

    When do we meet the first politician of ever less? Is it a he, or a she? Does it wear a uniform, or an orange dress?

    Does it want us to speak, or to listen? Or both?

    Does it want us to rob, or to share?

    I’ll give you a clue; there’s nothing to share with 8 billion useless eaters and a collapsing jit economy.

  19. Thanks for update. I still can’t get my mind straight on the concept of debt. In my viewany debts must be someone else asset/claim (apologies for deficiency in command of the English language). I mean if you owe something there must be someone else that holds all that debt. The net effect on the economy should be nil? Or is there something I have misunderstood?

    • Here’s the way I understand it: suppose that a house builder buys a lot, building materials and labor to build a house. A bank creates money in the form of a loan to a house purchaser who then uses the money to purchase the home. Debt has just enabled the ownership of some material thing (the house) to move from the builder to the purchaser. The purchaser then pays off the loan in installments, so most of the money that was originally created by the bank is destroyed during the loan repayment process.

      But some new money still exists. There is the profit that was paid to the homebuilder when he sold the house and there is the interest paid to the bank (which may, depending on the interest rate, be nearly as much as the original loan). All this new money enters the market and cascades through it, creating demand for goods and services purchased with this new money. This in addition to the money the builder re-invests in the production of a new house.

      Debt creation just creates more money and that stimulates demand and enables someone to have the ability to pay for goods without saving up for their purchase beforehand. Since the home purchaser in my example didn’t have to save up for ten or twenty years to buy a house, the debt funded purchase “brought forward” the purchase of the home.

      Remember that part of the money created by the bank loan was paid to the builder as profit for his business. Debt financing made the process of purchasing the house easier and probably made the profit margin (and house price) greater than it would have been if the house had been purchased with saved money. This is why easy credit tends to inflate asset prices in addition to creating demand for goods and services.

      Credit financing creates money and that new money stimulates demand. An economy has a great deal of difficulty growing without credit since the amount of money in circulation tends to be constant. If money is backed by a commodity, the money supply can only grow as fast as the commodity is extracted from the natural world. Money created by credit is the only thing that has allowed the modern industrial economy to grow as fast as it has. What happens when credit keeps growing but goods and services can’t grow (perhaps from lack of energy or other resources) is another story.

    • @Gunnar … My understanding of the system is that debt has allowed ‘us’ to bring forward the production of deeper lower grade resources of all types. The debt itself acts like a brake on the overall system for those in lots of debt have less ability to spend on resources.
      For example a young couple with big debt on a house will spend less on holidays and gadgets, or a business with a new mine and huge debt on it, will be unable to expand until the debt/equity ratio is more acceptable to markets etc.

      If we had a debt jubilee forgiving all debt, it would create instant inflation as those that were in debt are free to spend (go into new debt?), with exactly the same resources in the system.

      Debt while enabling extraction and use of new resources, also becomes it’s own weakness to future resource availability by using the easiest to get resources. Lot’s of debt growing is fine with infinite resources, as per economists expectations, but as soon as we hit limits everything changes.

      We are currently hitting those limits as all resources are lower grade, meaning more energy to extract, while we also have become aware of climate limits to burning fossil fuels, and limits to oil production in particular. Every ‘solution’, which IMHO are non solutions, require huge production of ‘stuff’ requiring an increase in resource extraction and use. This applies to solar, wind, nuclear, geothermal or even fusion. The other mostly forgotten aspect is that to build any type of new future complex energy system requires the existing system to continue unabated to allow all the new building. It’s a catch 22 in not enough energy to do it all and even if we did in 20-50 years time when everything needed replacing, we would have much lower grade resources and less energy to do it with.

      The inevitable future is an energy constrained future with ‘stuff’ (including services) relatively more expensive compared to incomes of everyone, so standards of living must fall on average for everyone. With huge debt in the system, it becomes a greater brake than in growing times and has to become debilitating without growth. Debt jubilees will just raise demand for everything, so we have backed ourselves into a corner of which there is no prosperous escape..

  20. Hi Dr Tim, thanks again for a great post on the future situation. A comprehensive summary (if such a thing is possible), well done. Unfortunately for those informed of the situation, like most readers here, trying to get outsiders to understand the problem, or even read through the full text is very difficult.

    I’ve pointed a couple of people to this latest post and both stated they got lost and didn’t finish reading it all, claiming too much gobbleygook or similar. (what they actually said!!). Yet those informed find you have just scratched the surface as the topic is so complex. People seem to want a simple problem with a simple solution and if it’s more just switch off instead of doing the hard work of decent research. These are intelligent, educated people I’m talking about, so probably above average IQ levels..

    Even on this forum people that seem to understand the problems ahead come out with statements like… and apologies @Tom not picking on you in particular, but just as the most recent example
    …..” trying to navigate my feeble savings through this all”….

    …. It’s the very nexus of the problem. People simply don’t want to be worse off, which is exactly what de-growth means, everyone is worse off year after year.

    It seems a human foible, or just the society we have all grown up in, or perhaps just genetic, that even if we understand the problem, we still want the ‘best’ for ourselves and our own families, looking for where to maintain our own level of resource use ahead of others. I’m as guilty as anyone, using the last few decades for investing in where I’ve seen the world heading and done very well.

    The way our civilization has developed over the last couple of centuries pretty much means that every politician must promise and pursue ‘growth’ so that everyone (on average) is better off, or not be elected initially or again. Even in authoritarian countries, the populace will boot out those not promising and promoting ‘growth’ for everyone (see the coups in West Africa recently as the example, or what’s happening in Sri Lanka).

    It seems that colla… sorry, “accelerating decline” is what is baked into the future with denial of the real problems being the prominent feature. Then the excuse of ‘nobody could see this coming’, which is of course bollocks.

    Part of the future I see, when oil in particular becomes much more expensive over time as depletion kicks in, is that coal to liquids gets promoted as another temporary solution needed to mine the minerals for the ‘green’ future. What this does though is allow the promise of ‘growth’, so whoever starts suggesting it will get voted into power in those countries with coal resources, or put in power where votes don’t matter….

    We already see temporary solutions happening on our way to the ‘green religion’ future as coal plants are being heavily used to replace Russian gas, but of course it’s just temporary, like growth…

    • I find the same response with acquaintances. And my reaction is the same as yours.
      Just tell them oil companies need $US 120 a barrel to break even on oil, but consumers can’t afford oil products at much over $80 a barrel. They can quibble at the margins of those figures, but the problem is stark.

    • This makes sense to me – this article might be comprehensive, but it’s very far from short…….

      I’m working on a short version, to be published here ASAP. I plan to place both the “long” and the “short” versions here as downloadable reports.

  21. Hi, Tim
    Thank you for this consolidation of your perspective. For the next iteration, can I suggest you include a glossary of your specialised terms: ECoE, PPP, PXE, RRCI etc. It wold be helpful if a glossary contained illustrative examples and, where appropriate, contrasts with other concepts covering the same notion but inadequate for SEE’s analysis.

  22. Hello again, Tim.
    Can you explain, please, why ECoE is measured as a percentage.
    Also, can you specify the point in the energy-use process where you take your measure? For example, if it takes 10 units of energy to extract 100 energy units of oil from underground, that a 1:10 EROI. But if transporting the oil to the refinery takes another 5 units, the refining itself takes a further 5 units, transporting and storing the refined oil takes another 5 units, the retail process (including the energy costs to both seller and buyer) takes another 5 units and the burning of the petrol wastes another 25 units (my car has three systems using air, water and oil to disperse the unusable energy). As well as these subtractions, the road network would require another 5 units of energy to maintain. That leaves an EROI of <1:2; is that an ECoE of about 55%?

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